Flexibility crucial for policy gains

Chinese policymakers need to be more vigilant and decisive while formulating monetary policy and keep it flexible to deal with uncertainties that could hamper economic growth in the coming months, economists said.

Globally, monetary policy normalization in some large developed economies, or the retreat from quantitative easing after the global financial crisis, may become one of the major uncertainties for China, requiring highly cautious policymaking that aims at building buffers and increasing resilience, a group of economists from the International Monetary Fund said on Thursday.

"But historically, market turmoil has often followed monetary normalization," which requires a premium on prudence, said Alfred Schipke, the IMF's senior representative for China.

He said recent US bond yields and dollar movements underscore the uncertainty and "Asia could be materially affected given its high household and corporate leverage".

Some economists said that a too sharp slowdown of broad money supply, or M2, as well as credit growth, may harm the macroeconomy but in a lagging period.

Wang Yongli, academic committee member of the International Monetary Institute of Renmin University of China, called for "vigilance" on possible economic weakening from negative impact such as multiple financial tightening policies taking effect at the same time, which might magnify the effect and restrain economic growth momentum.

"Monetary policy should be flexible and also have a response plan to deal with the possible economic cooling," he said.

China's M2 growth rate slowed to 8.2 percent in March, down from 8.8 percent in February and 8.6 percent in January. Yuan-denominated new loans also showed slower expansion in the first quarter compared with last year, according to data from the People's Bank of China, the central bank.

In 2017, China's broad money supply growth only recorded 8.2 percent, far away from the goal of 12 percent, which was also lower than the sum of the 6.9 percent GDP growth and 1.6 percent for the Consumer Price Index.

China was used to setting its annual target of M2 growth rate as a sum of the expected GDP growth rate, the inflation gauge of CPI, and an adjustment factor usually at 3 percent, according to Wang.

The reason was explained as a result of financial deleveraging by the monetary authority, but this scenario "is very rare in history" according to experts. It is the first year in 2018 that the government has abandoned M2 target as a monitor of the real economic growth.

The International Monetary Fund issued the latest version of Regional Economic Outlook: Asia and Pacific on Tuesday, and forecast "China's growth to moderate to 6.6 percent in 2018 as financial, housing, and fiscal tightening measures take effect".

The fund warned that there are risks and challenges ahead, including from a tightening of global financial conditions and a shift toward inward-looking policies.

"Strengthening monetary policy frameworks and central bank communications can bolster the importance of expectations, and exchange rate flexibility can help to insulate economies from imported inflation," it said. "Policymakers should focus on keeping debt under control."